Problem 1: Do you agree with the following statements? Why or Why not?
a. The benefits of corrective taxes as a way to reduce pollution have to be weighed against the deadweight losses that these taxes cause.
b. When deciding whether to levy a corrective tax on consumers or producers, the government should be careful to levy the tax on the side of the market generating the externality.
Problem 2: Charlie loves watching Teletubbies on his local public TV station, but he never sends any money to support the station during its fundraising drives.
a. What name do economists have for Charlie?
b. How can the government solve the problem caused by people like Charlie?
c. Can you think of ways the private market can solve this problem? How does the existence of cable TV alter the situation?
Problem 3: The Tax Reform Act of 1986 eliminated the deductibility of interest payments on consumer debt (mostly credit cards and auto loans) but maintained the deductibility of interest payments on mortgages and home equity loans. What do you think happened to the relative amounts of hide problem borrowing through consumer debt and home equity debt?